Media General (NYSE:MEG) stock has experienced significant volatility in recent months. The stock was demolished in October when Moody’s (NYSE:MCO) and S&P lowered the company’s credit rating and Media General reported the disappointing results investors have come to expect from the current management team. Since October, the stock has increased five fold only to once again suffer from the results of an incompetent management team which warned of potential covenant compliance issues, despite what could be a record year for political ad dollars funneling into Media General’s geographically attractive regions. Media General was able to secure a short-term bridge amendment but MCO has returned to threaten a credit downgrade. These issues have led the stock to experience a great deal of push and pull between longs and shorts. However, Media General’s most recent announcement could be a major game changer favoring longs.
Yesterday, Media General announced that it was going to explore a sale of its Newspaper division. The company has hired its bankers to solicit interest from buyers and more importantly have received inquiries from several third parties in recent months. Regional newspaper transactions have been heating up and this is great news for Media General investors, possibly representing a real game changer in terms of Media General’s valuation. Before addressing that, let’s first cover the recent “story” behind Media General.
From late 2010 through June 2011, Media General had a massively wide window that it could have taken advantage of to refinance its $363MM of bank debt due in 2013. Instead, management floundered and showed no sense of urgency. Media General’s $363MM bank debt carries a rate of L+450 which equates to an annual interest cost of ~$17MM, extremely attractive for a company with Media General’s credit profile. This is why if one looks back to the conference calls in those periods, investors were constantly mentioning going to market to refinance that debt and secure something similar to those terms to avoid a potentially troubling credit crunch. Given that Media General management is worst in class, no progress was made on refinancing and the world got caught in the Euro-zone crisis resulting in credit spreads blowing out.
Since October, credit spreads have come in significantly but lenders are still nowhere near where they were in late 2010 and H1 2011. As a result, even under the attractive current credit market, Media General’s new term loan will likely carry an interest rate around 10-11% meaning there will be about $20MM of additional cash interest when the new debt is rolled over. This is what I have discussed in a number of previous posts – highlighting that management has without question cost investors $20MM due to its bumbling. This has not been news to investors however, and the $5 stock price more than reflects the additional expected interest burden. Media General’s management team has also felt it deserves to be rewarded for this “achievement” as highlighted by CEO Marshall Morton’s recent option award.
Media General’s ability to obtain a short-term bridge amendment and no extension left longs somewhat concerned and short sellers thrilled. Further, the 8-K discussing the amendment mentioned Capstone Advisory, which is a well known restructuring shop, adding further ammo for short sellers to suggest Media General would be facing imminent bankruptcy. While Capstone is known for restructuring, it seems the short sellers were getting a bit desperate.
It is not uncommon to involve a firm like Capstone for valuation assistance as well as to strong arm the borrower on the behalf of the lender to rationalize costs as well as consider asset sales. In my previous post I also covered why Bank of America (NYSE:BAC) would favor only an amendment rather than an extension. Bank of America’s main goal is to avoid taking a hit on the bank debt. With the Term Loan B (TLB) market on fire, there’s a good possibility that Bank of Americacan now roll Media General off its Term Loan A into the TLB market whereby Bank of America has no credit exposure to Media General going forward. As counter intuitive as it sounds, if credit markets were worse, there would be a higher likelihood in my cynical view that Bank of America would have taken the “delay and pray” approach and have extended Media General’s loan. But with credit markets much more robust, Bank of America can squeeze Media General out into TLB and things work out for everyone where Bank of America secures some arranger/syndication fees, takes no hit on its credit, and walks away with no future credit exposure to Media General.
This is why the idea of bankruptcy does not make sense despite what short sellers may have been hoping for. Going in court would make no sense if the debt is trading in the mid to high $90s because the lenders would now be hit with various ongoing fees and just the overall hassle and time sorting out the various creditor claims. There’s no near-term issue that would really prod lenders to pursue bankruptcy, particularly when Media General’s bank debt is not due until March 2013. As demonstrated by a number of recent deals such as Spanish Broadcasting Systems (NASDAQ:SBSA) which had a significant amount of debt due in the coming months, lenders are not that excited about taking a company into bankruptcy if they can avoid it.
Another reason Media General would fight aggressively to avoid bankruptcy is because management has a major incentive to avoid bankruptcy. This may seem like an obvious statement but the reality is some management teams inherit bad situations. These management teams might come in too late to save the company so when the company does get into Chapter 11, the lenders and a firm like Capstone would probably be fine keeping management as the firm restructures. Media General’s management team is pathetic and created all of its current problems from poor acquisitions to missed financing opportunities. Due to the voting structure of Media General, this management team has been able to remain in place while others – whether it’s employees, shareholders, or creditors – suffer for management’s failures. It would not be unreasonable that Media General’s creditors, if Media General did restructure, would force CEO Morton and his team out the door. Finding a new team would be another headache Bank of America would not want to deal with and Morton and his team likely realizes that they are finished if they ever leave Media General.
This chain of events and various incentives have led Media General to take steps that may finally enable the company to achieve a much higher valuation than it currently carries. As those familiar with Media General are aware, prior conference calls yielded numerous questions asking whether Media General was exploring asset sales. Media General management would always provide a response that led Media General investors to believe that there was little enthusiasm on management’s part to pursue a sale. This makes sense as most management teams like to manage large companies and can therefore justify higher compensation. Media General management would also claim a certain synergy existed between its regional papers and television stations. However, everyone involved with Media General knows this team has no credibility and its competence from execution of strategy, acquisitions, and financing are all laughable.
This is probably where Capstone came in during the current refinancing process and quickly demonstrated that a healthy market for all of Media General’s properties – broadcast or print – exists, and that pursuing a sale could help defray Media General’s financing issues. So in spite of Media General management avoiding any sale opportunities in the past, Media General equity holders are getting lucky between healthier financing markets and now what is likely a forced effort by Bank of America and Capstone to dispose of its Newspaper division. Media General’s bank debt also has a special asset carve out provision which gives it seniority over the bonds so the proceeds of the Newspaper segment would immediately benefit Bank of America and the rest of the bank group. If Media General can get a decent valuation for its Newspaper segment, Media General’s valuation could improve markedly from current levels.
TABLE I: Media General 2011 SUMMARY FINANCIAL DATA ($MM) (SOURCE: Media General Q4 2011 EARNINGS RELEASE)
Table I highlights basic information regarding Media General’s various divisions. What is clear is that its Digital division, which Media General’s management team embarked on several years ago, has been a total failure and value destroyer, and the Newspaper division generates margins on a platform basis that detract from Media General’s key Television segment. Nonetheless, the Newspaper segment is cash flow positive on a platform basis and a number of buyers could improve upon what Media General management has achieved. The question is what price does the Newspaper segment command? A September 2011 conference by the Jordan Edminston Group (JEGI) illustrates what typical Newspaper multiples have been. As JEGI notes, the lack of transaction data leads to a composite of publicly traded data for valuation support. This data along with current public comps of regional pure play newspaper companies suggest there could be significant value for Media General’s Newspaper division.
EXHIBIT I: MEDIA TRANSACTION MULTIPLES (SOURCE JORDAN EDMISTON GROUP 2011 PRIVATE EQUITY FORUM – SEPTEMBER 22 2011)
TABLE II: PUBLIC NEWSPAPER COMPARABLES
Table II demonstrates the difficulty in comparing pure play regional newspaper comps due to varying capital structures and as a result includes both Enterprise Value and Market Capitalization metrics based on sales and EBITDA. Even with the extreme discrepancies between the companies’ capital structures (AHC and DJCO have no debt while LEE and MNI are extremely levered), Table II can still help establish a floor for the value of Media General’s Newspaper division.
LEE and MNI may be the most appropriate comps given their scale and leverage. The Price/Sales multiples they both carry can be instructive for establishing a worst case valuation for Media General and I believe MNI’s P/S multiple of 0.2x is a good lower bound for Media General’s Newspaper division. This would translate into a valuation of $60MM or about 2.0x Media General’s LTM EBITDA. As I have mentioned in prior write ups, I believe this division can be sold for a conservative 2.0x-4.0x+ EBITDA so this is actually consistent with the lower bound of my cautious estimate.
While the public comps establish a very conservative floor, I think there is one very recent transaction that is near ideal for Media General’s Newspaper division to comp to, providing a lot of potentially positive and relevant information regarding the potential value of Media General’s Newspaper division. On January 6, 2012, The New York Times Company (NYSE:NYT) sold its Regional Media Group (RMG) which consists of 16 regional newspapers for about $150MM. Exhibit II provides RMG’s segment data for recent fiscal years and compares it to Media General’s Newspaper division.
EXHIBIT II: RMG 2011 FINANCIAL DATA
As recently as 2010, Media General’s Newspaper division compared very favorably to RMG, with lower operating costs and higher EBITDA margins. In 2011, Media General’s segment took a hard turn downwards with a nearly 9% decline in revenues in the Newspaper segment. However, a competent acquirer could be very willing to pay a similar valuation relative to what RMG was sold for. The sizes of both RMG and Media General’s Newspaper division are comparable and it was not long ago when Media General’s Newspaper division performed better than RMG. Better overall strategy relative to Media General’s management could probably yield a turnaround that has eluded Media General’s management team.
RMG owns properties in Florida, North Carolina, Alabama, as well as California. Halifax Media, with its own operations in Florida and other southern states, was the buyer of RMG and could very well be a suitable buyer for Media General’s Newspaper division. Matching geographies would allow significant cost savings for the combined company, provided there were limited antitrust issues. One favorable sign is that the FCC has been relaxing rules related to newspaper-broadcast overlap so perhaps combining newspapers in similar regions, primarily when a case can be made for poor chance of survival on their own, would allow these deals to breeze by. In either case, RMG and the valuation of public comparables suggest that Media General’s Newspaper division can fetch a pretty attractive price. If a valuation can be realized close to what RMG sold for, then Media General’s aggregate valuation stands to significantly improve.
TABLE III: Media General NEWSPAPER VALUATION SENSITIVITY ANALYSIS
Table III helps illustrate how an attractive sale for the Newspaper segment can help Media General with the yellow highlighted range as where I think a deal could shake out. If Media General’s Newspaper Platform EBITDA figures are the “real” segment figures, then it is very possible for Media General to sell the division for a valuation similar to RMG. If the company can realize $100+MM for the division, those proceeds would go towards reducing its bank debt, per the carve out provision that the bank debt has over the high yield bonds. This is reflected in the Post Newspaper Transaction Capital Structure segment of Table III where the pro forma (NYSE:PF) bank debt is reduced by the sale proceeds.
Given Media General’s credit rating, state of the credit markets, and cash flow profile, it is very likely that Media General’s refinancing would yield interest rates in the 10-11% range or about $38MM related to the $363MM in existing bank debt. I believe this has been more than priced into shares in the $5 range. The current interest rate yields about $17MM in interest expense on that same piece. By reducing the bank debt by $100MM, Media General’s overall credit profile could improve, resulting in both cheaper rates for Media General to refinance along with a lower aggregate debt burden.
The major benefit is that Media General gets rid of an asset that would be a perpetual drag on its operations. After 2012, Media General would face a challenging 2013 without the aid of a strong political year, the Summer Olympics, and NBC broadcast Superbowl. This is the concern most lenders have as the Broadcast division would have a reduction in revenue. However, if Media General keeps the Newspaper segment it is likely that this segment continues to wither away in 2013, becoming an increasing operational drag.
EXHIBIT III: Media General POST NEWSPAPER SEGMENT SALE ANALYSIS (KINNARAS ESTIMATES)
EXHIBIT III is a crude presentation as the closing of a sale is not assured and terms of the refinancing would vary based on the sale process but it nonetheless helps illustrate the benefit of selling the Newspaper segment. Exhibit III assumes Media General’s Newspaper division is sold for 4.0x 2011 platform EBITDA generating $113MM which is used to pay down $363MM of existing bank debt. I also take a leap of faith and assume Media General’s credit rating would be improved through divesting its Newspaper segment and paying down debt. With an improved rating, Media General’s reduced size $250MM TLB could be priced at L+700 with a 1% floor or effectively 8%. For 2012, I assume the Television segment increases revenues by 23% over 2011 segment revenues while the Digital (Dealtaker) segment declines by 4%. I assume Digital generates a $1MM EBITDA loss while Television generates 35% platform EBITDA margins. When television ad demand is robust, broadcasters experience significant margin expansion. In 2010, Media General’s Television segment generated platform EBITDA margins of 34%. I also assume that if Media General is able to sell off its Newspaper segment, it’s corporate overhead will be reduced by roughly 50% or $13MM. This could be over or understated, it’s a guess primarily in that I assume a number of corporate functions in Richmond dedicated to the significant size of the Newspaper segment could dissolve.
I also assume capex tracks at $15MM with the Newspaper segment sold. Public pure play broadcasters have capex that runs anywhere from 3-6% of sales and I assume Media General will run capex at roughly 4.5% of sales. Public pure play regional newspapers run capex at <3% of sales so, which highlights the fact that Media General has run capex at much higher levels than peers. I am guessing that the higher historical capex by Media General could be related to the maintenance of printing assets related to third party print jobs. In either case, one can see that Media General should be able to deleverage on a steadier basis once the Newspaper segment is sold, potentially generating $22MM in free cash flow in 2012 and remaining cash flow positive in 2013.
If Media General keeps its Newspaper segment its overall EBITDA levels for 2012 should still be fairly strong. The problem is 2013, and if the Newspaper segment continues its recent history of annual sales declines of ~8%, it could become a major drag. The No Newspaper Sale scenario projects that Media General’s Newspaper segment will decline by 7% in 2012, improving against the 9% decline in 2011, and then decline by 8% in 2013 along with an estimated 15% decline in Television from 2012 figures. The problem is that Media General appears to have reduced expenses per its corporate cost structure by as much as it can. In 2011, it reduced its operating costs by about 4% by aggressive headcount reductions and furloughs. I assume Media General will maintain 2012 expenses in line relative to 2011 and then assume it can miraculously find 5% in cost savings in 2013.
2012 will not be an issue at all in either scenario but 2013 is where Media General would face some challenges. By keeping the Newspaper segment, Media General will have no chance for an improvement in credit rating and will be in line to refinance in the 10-11% range given current market conditions. In addition, CapEx will be where Media General announced in its earnings release. As a result, Media General could potentially be cash flow negative in 2013. This may not be the end of the world as Media General would try to incorporate covenants structured to allow some breathing room in off political years, something the current 2013 maturity does not have, during the refinancing process.
While there are a number of wide ranging assumptions to consider, Exhibit III still explains how Media General can benefit by shedding the Newspaper division. Keep in mind, even if Media General’s credit rating is unchanged after selling its Newspaper division and its $250MM TLB is priced at ~10.5%, it would still generate about $17MM in free cash flow in 2012 and still be cash flow positive in 2013. Another benefit to Media General investors if the Newspaper segment is sold is that Media General could benefit from valuation expansion due to an improved credit standpoint as well as becoming a pure play broadcaster.
TABLE IV: PURE PLAY REGIONAL BROADCAST COMPS
With just the Broadcasting and Digital divisions, Media General could start trading closer to broadcasting peers. BLC, GTN, and SBGI are the most appropriate comps as TVL owns a number of MyNetworkTV and CW affiliates relative to the major affiliates Media General and the other three comps maintain. A satisfactory sale of Media General’s Newspaper segment would almost assuredly yield a post transaction capital structure for Media General that is superior to GTN but it’s a stretch (but not impossible) to assume it would be as good as the other peers. As a result, one simple way of valuing Media General would be to use a composite of its peers EV/2012 Revenue metrics. With valuation pointing to a 2.2-2.7x range for Media General’s relevant peers, Media General could be valued at $830MM-$1020MM before excluding debt when using the 2012 revenue estimates in Exhibit III. Assuming a reasonable sale price of 4.0x Media General’s Newspaper platform division, Media General’s shares could be valued between $7-$15 when accounting for Media General’s pension and its reduced debt.
The Net Debt/EBITDA figures in Table IV do not include pension liabilities which in some cases are significant. For example, if net debt included BLC’s pension liabilities, it’s Net Debt/EBITDA would be 5.1x. So the Media General share price estimate I have provided is more conservative in that it is netting out all debt – corporate and pension – from Media General’s share price. The reality is that equity prices don’t seem to incorporate those pension liabilities. If Media General’s valuation were to exclude those pension liabilities, as the comps in Table IV do, shares could be worth $13-$21.
These valuation figures may sound as though they have materialized from an insane asylum but they can be supported by hard, actual trailing figures as well. Referring back to Table I, Media General’s earnings release reported a combined Broadcast and Digital revenue of $317MM in FY 2011. The public comparables in Table IV provide EV/LTM Sales metrics and the range for the relevant comps is 2.3x-2.8x EV/LTM Sales. Using these metrics for Media General’s reported 2011 non Newspaper revenue of $317MM and assuming Media General’s debt would be reduced by a sale of its Newspaper division for 4.0x its platform EBITDA would suggest a share price between $8-$16. The big question is whether a sale close to $100MM+ can be realized for Media General’s Newspaper division.
To some extent, it does not matter given where Media General’s share price currently is. With the Newspaper division now being up for sale, market participants have had a couple of days to determine where Media General should trade based on the expected value Media General’s Newspaper division will fetch. At about $5.50 per share, Media General’s EV is about $770MM, meaning market participants think there will be no sale of the Newspaper segment or the value will be essentially $0. Referring back to Table II, one could make the case that the floor valuation for Media General’s Newspaper division is about $60MM or 0.2x the Newspaper segment’s 2011 sales. If Media General were to execute a sale at this level, Media General’s stock, using the pure play relevant broadcast metrics, would still be reasonably valued at $6+.
A share price near $10 is further supported by recent transaction multiples in the broadcast sector and the disposal of the Newspaper segment could make a future sale of the broadcast segment a possibility. As discussed on Media General’s Q3 2011 conference call and various industry reports, broadcast television companies have exchanged hands at 8-10x cash flow. Analysts have suggested Media General can generate about $100MM in average three year broadcast platform cash flow and in one of my prior pieces, I suggested a four year average including two off political years, one Congressional year, and one Presidential year, could yield average cash flow of $95MM. If Media General could sell the Newspaper division for a little over $100MM, a valuation of 8-10x $95MM could support a double digit share price.
This is what the notion of game changer means in the context of Media General if it can sell off its Newspaper division. If Media General can get a decent price for its Newspaper division, the credit profile improves, the ongoing operational drag disappears, the valuation becomes simplified, and other transaction opportunities emerge. The overall range of Media General’s share price could shift as well, from flirting with $1 due to concerns about solvency in Q3 2011 and on going concerns regarding the Newspaper division, to now having a potential bottom valuation in off-political years of about $4 and a potential high in the $10-12 area in strong political years.
For example, pure play broadcast companies are currently valued at 7.2x-8.0x EV/LTM EBITDA with the LTM essentially being 2011 – an off political year. Excluding the Newspaper segment, Media General generated $87MM in platform EBITDA in 2011. If my assumption of corporate overhead allocations is correct and thus pro forma overhead can be reduced by half, Media General’s off-political year EBITDA could be $75MM-$80MM, potentially higher if the Digital segment can stop losing money. At the top end of the EV/LTM EBITDA metrics and assuming a $100MM+ sale for the Newspaper division, Media General’s off political year share price could be around $5…basically where Media General is currently trading at the start of what will be a strong performance on-political year.
Also, with the Newspaper segment shed from Media General, it could be possible for the company to now be sold off to another broadcast company. I have a healthy level of cynicism when its comes to Media General management and I would not be surprised if Media General has been approached about both its broadcast and newspaper divisions in recent years. However, Media General management probably scoffed at any sale of either division in the past because they would be stuck managing a struggling Newspaper segment and may actually have to be paid far less for a Newspaper-only Media General to survive. Conversely, they probably passed on selling the Newspaper division because even though it struggled in 2011, overall, as illustrated in Table I, it served to essentially subsidize a very very fat corporate overhead cost structure. Of the $26MM in total corporate overhead, it appears based on Media General’s proxy (page 13 and 27) that 14% of total corporate overhead goes to just the salaries of Media General’s top five executives along with cash fees to directors.
Due to the voting structure of Media General’s equity, the management team has been able to remain unaccountable for any of its actions. I suspect during this refinancing process, Capstone was able to strong arm management by prodding them to dispose of the Newspaper segment and if this was the case, I also expect that Capstone and BAC will play an active role in evaluating offers. In the press release Media General revealed that it has been approached by third parties for the Newspaper division so I would not be surprised if it was approached regularly over the past year as valuations for the segment heated up, yet management avoided selling primarily because it enabled them to maintain exorbitant compensation. If the Newspaper division received expressions of interest, it is very likely that crown jewel of Media General – Broadcasting – has received inquiries for a potential sale. If Media General sells the Newspaper division it may be easier for a potential acquirer to more publicly approach Media General shareholders about acquiring it in the future.
Media General has had a very interesting past twelve months as reflected by the stock price performance and in spite of abysmal performance by management at nearly every level (strategy, execution, financing), Media General shareholders may get very lucky. Credit markets have improved significantly, allowing management to be bailed out with what should be attractive pricing of its new debt. While credit markets have improved, I believe Media General’s lenders have also gotten tougher on Media General management through possibly taking an active role in the exploration of selling the Newspaper division. Recent transaction comps such as the RMG sale to Halifax Media suggest the Newspaper division can lock in quite an attractive sale price which would improve Media General’s overall credit profile and future outlook. If these things can occur in what’s expected to be a phenomenal year for broadcast television, particularly in the regions where Media General operates, the stock could be poised to experience a dramatic shift upwards.
Disclosure: Author manages a hedge fund and managed accounts long Media General.